The global economy will expand by 3.9% for 2010, the IMF predicts in an update released today. That’s up from its 3.1% forecast for 2010 that was published last October. Of course, today’s forecast update contrasts sharply with last year’s modest contraction in the global economy. For 2011, the IMF expects global output will accelerate to 4.3%.
Progress, it seems, is unfolding as we write. But there are caveats as well.
“The recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures,” according to the IMF update. “For the moment, the recovery is very much based on policy decisions and policy actions. The question is when does private demand come and take over. Right now it’s ok, but a year down the line, it will be a big question,” IMF Chief Economist Olivier Blanchard said in an interview.

Continue reading →

David Champion of the Harvard Business Review is unimpressed with the Obama administration’s proposal on banking reform. In fact, he’s downright dismissive:
“The Obama reform… seems to be neither radical nor particularly useful, except perhaps as political theater,” Champion writes.
Of course, that’s far from the consensus view, at least when surveying the movers and shakers. Britain’s central banker Mervyn King seems to be in favor of Obama’s plan. Ditto for OECD’s secretary general.
Meanwhile, a pair of finance professors from NYU weigh in and offer support, with some caveats: “On balance, President Obama’s plans – a fee against systemic risk and scope restrictions – seem to be a step in the right direction from the standpoint of addressing systemic risk, if their implementation is taken to logical conclusions.”
But this is all beside the point for the moment. What will the reform really look like once it runs through the political sausage grinder? Meantime, one might wonder if the core of the alleged solution–separating conventional banking from the trading-oriented aspects of financial institutions–is a touch misguided. It certainly plays well as headline material. But wasn’t the real problem one of poorly designed loans? In that case, what do proprietary trading desks at investment banks have to do with any of this? Is it really the case that if we separate prop desks from banks the odds of another real estate buying frenzy will be diminished? Or might there be other factors to consider? Such as extraordinarily low interest rates?

A new research paper from the New York Fed connects some of the dots for thinking that monetary policy, balance sheets in banking, leverage, credit cycles and macro risk premiums are related (“Macro Risk Premium and Intermediary Balance Sheet Quantities”). That’s hardly shocking, or at least it shouldn’t be. But revisiting the economic plumbing is refreshing, not to mention necessary, as far too many pundits go off the deep end in assigning blame and evaluating cause and effect.

Continue reading →